4/14/2009 @ 4:00PM

Ben Bernanke Wants Out

Federal Reserve chairman Ben Bernanke is seeing “tentative signs” of economic improvement, which makes it time for the central bank to begin talking about its exit strategy.

In a talk at Morehouse College, Bernanke summarized much of his own recent commentary and insisted that he remains optimistic despite the Fed’s March downward revision of GDP forecasts and expectation that unemployment will rise into 2010.

“Recently we have seen some signs that the sharp decline in economic activity may be slowing,” Bernanke said.

Bernanke’s speech comes on the front-end of a week filled with speeches from various Federal Reserve presidents, as well as another by Bernanke on Friday, followed by vice chairman Donald Kohn on Saturday.

“I think they’re going to continue to focus on its efforts to stabilize the financial system,” said Michael Feroli, senior economist at JPMorgan Chase. “I also expect them to defend the Fed’s actions thus far, and to talk more about exit strategies.”

And talk they should. In light of Bernanke’s commentary, any absence of further discussion of a recovery from Fed officials would appear odd, as well as any corresponding exploration in respect to exit strategies. Feroli hopes that officials will discuss how they’re preparing for the possible inflationary consequences of the Fed’s recent stimulus.

For his part, Bernanke discussed the central bank’s struggle over price stability, and the issue will surely be retold by the bevy of other speeches from various Federal Reserve Bank presidents later this week. At least in Bernanke’s case, he’s confident in the Fed’s ability to deal with inflation later whilekeeping interest rates at essentially zero due to economic weakness in the United States, and the rest of the world, in the medium-term.

Nonetheless, Bernanke noted that the liquidity the Fed has injected could begin to pose an inflationary threat unless the Federal Open Market Committee pares it down and raises interest rates. Bernanke’s offered very general details though, saying it would take such measures “at the appropriate time”.

“That said,” Bernanke added, “unwinding or scaling down some of our special lending programs will almost certainly have to be part of our strategy for reducing policy stimulus once the recovery is under way.”

In a side note, Bernanke said the housing bubble was a result credit inflow, rather than low interest rates. Bernanke also expects the U.S. dollar to remain the dominant reserve currency for the foreseeable future.